Kyrgyzstan: Government Continues Circling No. 1 Investor

Kyrgyzstan’s state environmental regulator agreed to authorize a continuation of work at the Centerra Gold-operated Kumtor gold mine in the eastern part of the country. Centerra still faces $100 million in fines handed down in May for alleged ecological violations. (Photo: Centerra Gold)

Kyrgyzstan’s largest investor, mining company Centerra Gold, received a reprieve when a key operating permit was recently renewed. But more drama likely lies ahead.

Lurking in the background during the ceaseless wrangling between the government and the Canada-based company is the nuclear prospect of Kyrgyzstan nationalizing its Kumtor gold field. Kyrgyzstan’s ultimate ambition is to obtain more revenue from the field for state coffers. The mine has generated up to 12 percent of the country’s GDP in recent years.

In June, Kyrgyzstan’s state environmental regulator authorized a continuation of work at Kumtor, despite Centerra facing $100 million in fines handed down in May for alleged ecological violations. That should ensure uninterrupted operations at the high-altitude, open-pit mine through the end of the year.

While that is happening, however, the miner will have to fend off numerous other legal assaults. President Almazbek Atambayev last month ordered the state prosecutor to investigate the legality of two deals drawn up for the mine in 2003-2004 and 2009 respectively.

The Kyrgyz government, which owns a one-third stake in Centerra, is playing hardball. Centerra has claimed that foreign employees are being prevented from leaving the country. The allegations, which are denied by Kyrgyzstan, have been confirmed by diplomats who spoke to EurasiaNet.org on condition of anonymity.

The significance of Kumtor to the nation’s economy cannot be overstated, particularly given the broader regional downturn. Russia’s economy has tanked under the weight of low oil prices and international sanctions, and Kazakhstan too may see a minor contraction this year.

Government figures show that Kyrgyzstan’s economy contracted by 4 percent during the first five months of 2016 compared to the same period last year — a drop that has been attributed to a phase of weak production at the mine. The significance of that figure should not be overstated as winter is a natural economic dampener. Production at the Kumtor mine is projected to rebound in the second half of year, although overall annual growth is expected to be a subpar 2 percent.

With negotiations over a restructured ownership arrangement for Kumtor going nowhere, the more than 2,000 people who actually do the work at the field are emerging as important players.

Eldar Tajibayev, head of Kyrgyzstan’s biggest mining and metallurgy labor union, has said he would not be able to halt labor protests at Kumtor.

The average Kumtor employee “is probably a 40-year old husband with three children and a wife that doesn’t work. Many have a higher education degree and earn an average of 60,000 soms (nearly $1,000) [per month],” Tajibayev told EurasiaNet.org. “More than 70 percent of them are mortgage holders paying roughly 20,000 soms in monthly payments while supporting other family members. Everything is on the line for these people.”

For the country’s officials, though, Kumtor serves a doubly useful function — providing revenue while also acting as a dependable whipping boy. Independent news website Zanoza concluded as much in a recent acerbic BuzzFeed-style article titled “Nine Reasons Why Politics Would Be Boring Without Kumtor.”

“If not for Kumtor, who would we have to blame for the ills of the economy [during the bad times]? And yet when, because of Kumtor, indicators for exports and industrial production do rise, government officials puff their chests as if they are the ones pulling ore out of the mine,” the article noted.

With the passage of time, Centerra’s position has arguably strengthened.

Unlike in 2009, when Kyrgyzstan faced limited resistance while negotiating a more favorable deal with the company, Kumtor is no longer a young mine.

Without the costly prospect of expansion, the current mine’s useful life is expected to run until 2026, with some forecasting significant drops in production before then.

Centerra has recently expanded its global portfolio, by buying out US miner Thompson Creek Metals for $1.1 billion. In the process, Centerra came into ownership of Mount Milligan, a combined copper and gold reserve whose output could reach an equivalent of one-third of Kumtor’s current annual gold production in the coming years. “With Mount Milligan and Kumtor, the […] company will have a high-quality diversified producing platform with a balanced geopolitical risk profile,” Centerra said in a July 5 statement about the Thompson Creek merger.

This deal should in theory benefit Kyrgyzstan as a major Centerra shareholder. And yet, extended legal battles with other investors, chiefly those jilted following revolutions in 2005 and 2010, have seen many of Bishkek’s Centerra shares frozen as collateral in international courts of arbitration.

Sure enough, Kyrgyz officials objected to not being consulted over the Thompson Creek deal, arguing that it could prove detrimental in view of a likely share dilution.

Negotiations over a deal that would have seen Kyrgyzstan divest itself of its Centerra interests in exchange for a 50 percent stake in the Kumtor mine itself collapsed last year.

And with that agreement off the table, there is “no cohesive strategy for devising a new deal, and in the long term, no clear solution to the Kumtor dispute,” Kate Mallinson, a senior partner at the London-based GPW risk consultancy, told EurasiaNet.org in an email.

For all that, Atambayev “is resolved to find a solution to the current deadlock before the likely end of his tenure in the 2017 presidential elections,” said Mallinson.

Mallinson believes nationalizing Kumtor is unlikely in the short term, citing government fear of the legal challenges that would follow and the logistical difficulties inherent in running the mine.

That has not stopped Ata-Meken, a left-leaning faction in parliament that has embraced nationalist rhetoric, from resurrecting a dormant bill on doing just that. Ishenbai Kadyrbekov, a former parliamentary speaker who was a member of a government commission on Kumtor in 2012-2013, supports nationalization and has cited Iran and Saudi Arabia as precedents of countries that nationalized foreign-held mineral wealth and, as he claimed, escaped legal repercussions.

“The Canadians have put the government in a bind. They understand that nationalization makes us afraid,” Kadyrbekov told EurasiaNet.org.

“The initiative for nationalization should come from President Atambayev and be supported by the majority coalition in parliament. The 50-50 deal proved to be another scam, so this is the only way out now.”